India raised less than 25 percent of its target from an auction of airwaves, a sale Finance Minister Palaniappan Chidambaram was counting on to avert a sovereign credit downgrade. Bharti Airtel Ltd. (BHARTI) and Idea Cellular Ltd. (IDEA) gained in Mumbai.
The government raised 94.08 billion rupees ($1.7 billion) after operators stayed away from bidding for a CDMA band and for the nation’s two biggest cities, telecommunications minister Kapil Sibal told reporters in New Delhi yesterday. That falls short of the 400 billion rupees targeted by Chidambaram to help narrow the budget deficit to 5.3 percent of gross domestic product in the year to March 31, from 5.8 percent in the previous 12 months.
The failure to meet the revenue goal from the spectrum sale may result in higher borrowing amid threats of a junk rating by Standard & Poor’s and Fitch Ratings, according to Upasna Bhardwaj, an economist at ING Vysya Bank Ltd. (VYSB) Demand for the airwaves waned after the government set a reserve price of almost nine times their original cost at a 2008 sale, Rajan Mathews, director general of industry group Cellular Operators Association of India, said in a telephone interview at the end of the first day of the auction on Nov. 12.
“Definitely it is a disappointment and the finance ministry will have to look at different ways to garner revenue,” Mumbai-based Bhardwaj said in a telephone interview. “Right now, there’s uncertainty on the fiscal side. They will have to look at extra borrowings.”
Chidambaram is seeking to curb the budget deficit to an almost decade low of 3 percent in five years as S&P and Fitch reduced the outlook on India’s credit rating to negative from stable earlier in 2012, bringing the nation a step closer to non-investment grade.
“This is the market and this is how it has played itself out,” Sibal told reporters, after saying on Nov. 8 that he had “high expectations for aggressive bidding to bring as much as possible to the kitty.” The government still plans to complete the auction of unsold spectrum before the end of the financial year on March 31 and has yet to decide on lowering the reserve price for Mumbai and New Delhi, he said.
Shares of Bharti, which spent the least at the auction, jumped the most in two weeks, advancing 2.6 percent to 290.3 rupees today in Mumbai trading, compared with a 0.8 percent loss for the benchmark Sensitive Index (SENSEX), according to data compiled by Bloomberg. Idea jumped 3 percent to 94.95 rupees, the biggest gain in a week.
The 1800 megahertz band was made available after the Supreme Court earlier this year said spectrum must be auctioned rather than sold and canceled 122 licenses, saying their original allocation had been corrupted by “money power” and some buyers’ “ability to manipulate the system.”
The Indian unit of Norway’s Telenor ASA (TEL) spent the most, paying 40.2 billion rupees on 24 blocks to reclaim its rescinded licenses, while Idea, controlled by billionaire Kumar Mangalam Birla, spent 20.3 billion rupees on 30 blocks, according to the Department of Telecommunications.
Videocon Industries Ltd. (VCLF) paid 21.3 billion rupees for 22 blocks, Vodafone Group Plc (VOD) paid 12.95 billion rupees for 23 blocks, while Bharti, the nation’s biggest operator, spent 87 million rupees on one block. Those were the five eligible bidders at the auction. Videocon rose 0.2 percent to 169.85 rupees, paring the day’s gain of as much as 2.8 percent.
“This has been a complete failure for the government and a victory for the incumbent players like Bharti, Idea and Vodafone,” said Daryl Philip, an analyst with Mumbai-based Finquest Securities Pvt. “Based on the sector’s finances, the government’s expectations were completely impractical. We should see some downward tinkering of prices going forward.”
The government set a reserve price of 140 billion rupees for this week’s auction, compared with the 16.6 billion rupees operators paid in 2008. The final auction price determined by the sale of 1800 megahertz band this month will serve as the opening bid for the 900 megahertz band to be sold by the end of March, according to Sibal.
The reserve price needs to be reasonable for operators to bid, Marten Pieters, chief executive officer for Vodafone’s India unit, told reporters in New Delhi yesterday. “Spectrum usage fees should be flat and only represent the charge for administering the spectrum,” the Newbury, U.K.-based company said in a statement separately.
“We are looking forward to a more predictable and stable regulatory environment,” Telenor Group President and CEO Jon Fredrik Baksaas said in a statement yesterday. Bharti’s spokesman Ashutosh Sharma declined to comment, while Idea’s spokesman Rajat Mukarji said the operator will issue a statement today.
A shortfall in revenue from the sale of the airwaves may pressure the government to step up sales of stakes in state- owned companies for funds, said ING Vysya’s Bhardwaj. Finance Minister Chidambaram raised the budget deficit target to 5.3 percent for the current financial year, from the 5.1 percent set by his predecessor Pranab Mukherjee.
The higher limit may require an extra borrowing of as much as 250 billion rupees, two finance ministry officials with direct knowledge of the matter said this month, asking not to be identified as they aren’t authorized to speak on the topic.
After the auction outcome, the gap may widen to 5.7 percent and the government may have to sell 300 billion rupees more of bonds, Bhardwaj said. The poor showing will not prompt any revision of the deficit target, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi today.
India plans to raise 2 trillion rupees in the second half of the fiscal year, Mayaram said on Sept. 27, leaving the target unchanged for the whole year at 5.69 trillion rupees.
The nation’s budget deficit is the widest among major emerging economies as slower growth hurts tax receipts and subsidies fan spending. Officials boosted diesel prices on Sept. 14 to restrain expenditure on compensation for below-cost sales.
India’s economic growth will slow to 4.9 percent in 2012, the least in a decade, the International Monetary Fund said Oct. 9. Quarterly growth slowed to an average of 5.4 percent in the first half of 2012, from 7.5 percent in 2011, according to the most recent government data.
“In terms of raising revenue and meeting the fiscal deficit target, the auction is a disappointment,” said Dharmakirti Joshi, the Mumbai-based chief economist at Crisil Ltd., the Indian unit of S&P. “The fiscal deficit this year will be higher than 5.3 percent. If they manage to control expenditure and the disinvestment program raises cash they may not need to” resort to higher borrowings.
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